Obama's Canada Visit Highlights Oil Sand Woes

Oil Sands
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NEW YORK (Dow Jones Newswires), Feb. 20, 2009

President Barack Obama's visit to Ottawa on Thursday has helped focus attention on the upheaval taking place in Canada's energy industry.

As plummeting crude oil prices have eroded the viability of newer energy sources, Canadian companies are racing to scale back investments in oil sands projects.

Meanwhile, the U.S. is starting to press for tougher restrictions on carbon emissions. After meeting Thursday, Obama and Canadian Prime Minister Stephen Harper said they had agreed to a "dialogue on clean energy" and a joint effort to develop clean energy technology.

Perhaps trying to soften the impact, Obama added: "This clean energy dialogue will move us in the right direction. We aren't going to solve these problems overnight."

David Collyer, president of the Canadian Association of Petroleum Producers, said the joint message from Obama and Harper touched on themes that the organization has been talking about, including a balanced approach to economic growth, climate change and energy security.

"I think it's a very considered and quite pragmatic approach," Collyer said. "I didn't see anything in there that suggested there was going to be any immediate change in regulations or anything that would cause me to be concerned about discrimination toward oil sands production from Alberta."

Still, the specter of tougher carbon emission limits likely will speed the exodus of smaller, less well-capitalized players from oil sands.

Among others, Teck Cominco Ltd.  -- market cap C$2 billion, according to Capital IQ -- and UTS Energy Corp. -- market cap C$820 million -- are widely expected to sell interests in Alberta's Fort Hills oil sands project.

Teck is carrying a large debt load, and Chief Executive Don Lindsay this week said the company is looking at various options that include asset sales. Meanwhile, UTS faces pressure for a sale of itself or a merger after France's Total SA recently offered more than C$600 million to acquire UTS.

With the equivalent of some 173 billion barrels of oil in oil sand formations, Canada has huge potential to supply North America with a lot more energy. But oil sands can be a messy source. Open-pit mining, refining and other aspects of production create substantial carbon emissions.

Asked Tuesday by a CBC interviewer if oil sands are a "dirty" energy source, Obama said, "What we know is that oil sands create a big carbon footprint."

He added, "I think to the extent that Canada and the United States can collaborate on ways that we can sequester carbon, capture greenhouse gases before they're emitted into the atmosphere, that's going to be good for everybody."

Eventually, oil sands production will have to change, said Vincent Lauerman, president of Geopolitics Central, a Calgary energy consulting firm.

More than three-fourths of Canada's oil sand deposits are situated too deeply for open-pit mining. Producers have developed drilling technologies that involve injecting steam into the deposits.

The approach makes it easier to limit carbon emissions, but it is relatively expensive and requires a lot of water.

Analysts believe that at a crude price above $60 a barrel, producers would have an incentive to develop oil sand properties. Thursday, Nymex crude settled at $39.48 a barrel.

In the quarter ended Dec. 31, Petro-Canada posted a C$8 million operating loss in its oil sands business. That was during a period when oil prices were mostly higher than now.

Not surprisingly, oil sands exploration is plummeting. From November through January, about 2,400 evaluation licenses were issued in Alberta, nearly half those in the year-earlier period, according to the Daily Oil Bulletin.

Energy companies understandably are anxious about stricter environmental controls in the current weak market. But they may have little choice.

"We had a free ride [on environmental regulation] over the last eight years under George W. Bush," says Lauerman. "It's a totally different game now."  

Copyright (c) 2009 Dow Jones & Company, Inc.

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